Walt Disney Earnings: Strength in Parks Not Enough to Overcome Tough "Star Wars" Comparable

By Beth McKenna Markets Fool.com

Walt Disney(NYSE: DIS) reported its fiscal first-quarter 2017 results after the market closed on Tuesday. The entertainment giant's revenue dipped 3% year over year, while adjusted earnings per share declined 4.9%. Earnings per share (EPS) on the basis of generally accepted accounting principles (GAAP) fell 10.4%.

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The company's overall performance was better than the headline numbers reflect. It faced extremely tough comparables, particularly in its studio entertainment business, due to the phenomenal success of Star Wars: The Force Awakens in the year-ago period. Moreover, there were some negative impacts related to shifts in the fiscal calendar.

The market's initial reaction was muted, with shares trading down 0.4% in after-hours trading on Tuesday.

Disney's key quarterly numbers

Metric

Fiscal Q1 2017

Fiscal Q1 2016

Year-Over-Year Change

Revenue

$14.78 billion

$15.24 billion

(3%)

Segment operating income

$3.96 billion

$4.27 billion

(7.3%)

Net income

$2.48 billion

$2.88 billion

(13.9%)

GAAP EPS

$1.55

$1.73

(10.4%)

Adjusted EPS

$1.55

$1.63

(4.9%)

Data source: Disney.

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The adjusted EPS comparison excludes a $0.13-per-share gain in the year-ago period related to Disney's investment in A&E Television Networks and other factors affecting comparability.

Disney doesn't provide specific guidance. To provide some context, Wall Street was looking for adjusted EPS of $1.50 on revenue of $15.26 billion. So the company comfortably beat expectations on earnings, but fell short on revenue. Long-term investors shouldn't place much weight on Wall Street's near-term estimates. However, they can be helpful to know, as they often help explain market reactions.

Image source: Disney.

Here's how the four segments performed.

Media networks: ESPN hurts results

Metric

Fiscal Q1 2017

Fiscal Q1 2016

Year-Over-Year Change

Revenue

$6.23 billion

$6.33 billion

(1.6%)

Operating income

$1.36 billion

$1.41 billion

(3.5%)

Data source: Disney.

Disney's cable business within media networks has been getting much attention for the last year-and-half due to declining subscriber counts, especially for cash-cow ESPN, driven by cable cord-cutting and cord-slimming. Let's drill down on the segment's results in table format.

Business/Metric

Fiscal Q1 2017

Year-Over-Year Change

Cable networks revenue

$4.43 billion (2.1%)

Cable networks operating income

$864 million

(11.4%)

Broadcast networks revenue

$1.81 billion

--

Broadcast networks operating income

$379 million

28.5%

Equity in the income of investees (an operating income line item)

$119 million (16.2%)

Data source: Disney.

Strength in broadcasting was unable to offset weakness in the cable business, combined with a decline in equity in the income of investees. The 11.4% decline in cable's operating income was due to a decrease at ESPN. This was due tohigher programming costs and lower advertising revenue, partially offset by affiliate revenue growth.

Affiliate revenue growth was due to contractual rate increases, partially offset by a decline in subscribers. No specifics with respect to the decline in subs were discussed on the earnings call.

One factor in cable's higher programming costs and lower ad revenue was the shift in timing of college football playoff bowl games relative to Disney's fiscal-quarter end. Six of these games were aired in the first quarter of the prior year, while three were aired in the reported quarter.

Equity in the income of investees declined due to lower equity income from A&E Television Networks and equity losses from BAMTech, a video-streaming company in which Disney acquired a 33% stake last August. CEO Bob Iger said at the time that the primary impetus for taking this stake was to provide the company with the ability to bring ESPN and its other content directly to consumers via subscription streaming services.

Parks and resorts: The quarter's champ

Metric

Fiscal Q1 2017

Fiscal Q1 2016

Year-Over-Year Change

Revenue

$4.56 billion

$4.28 billion

6.4%

Operating income

$1.11 billion

$981 million

13.1%

Data source: Disney.

Disney's second-largest segment was the only one that posted year-over-year increases in revenue, as well as in operating income. Strength was broad-based and included both domestic and international parks and resorts, and the cruise line.

Results are more impressive than they appear. That's because growth in domestic operations was negatively impacted by Hurricane Matthew -- which caused the company to close Disney World for about a day-and-a-half in October -- and a shift in the timing of the New Year's holiday relative to Disney's fiscal periods. (The New Year holiday fell within the first quarter of fiscal 2016, but fell within the second quarter this year.)

The increase in operating income at the domestic operations was driven by growth in guest spending, partially offset by a 5% decline in attendance and a decline in occupied room nights. Attendance in the year-ago period got a boost from the 60th Anniversary celebration at Disneyland, while attendance in the just-reported quarter was negatively impacted by Hurricane Matthew and the shift in the timing of the New Year's holiday. Investors shouldn't read too much into the decline in attendance, as CFO Christine McCarthy said on the earnings call that the one-time factors and the timing shift accounted for an estimated 4% of the 5% decline.

Growth at international operations was driven by Shanghai Disney, which opened last June -- so this is its first inclusion in fiscal first-quarter results -- as well as higher results at Disneyland Paris and Hong Kong Disneyland.

Studio entertainment: Solid performance, given the tough Star Wars comparable

Metric

Fiscal Q1 2017

Fiscal Q1 2016

Year-Over-Year Change

Revenue

$2.52 billion

$2.72 billion

(7.4%)

Operating income

$842 million

$1.01 billion

(17%)

Data source: Disney.

Studio entertainment, which is centered on Disney's legendary movie-making business, actually had a decent quarter in light of the nosebleed-high Star Wars'comparable bar it had to jump.

The theatrical success of Rogue One: a Star Wars Story and strong showings by Disney Animation'sMoanaand Marvel'sDr. Strange in the reported quarter were impressive. However, they weren't enough to match the year-ago period's results due to the smashing success of Star Wars: The Force Awakens, released before the 2015 holidays. Rogue One has grossed $1.042 billion worldwide, while The Force Awakens-- which ranks as the third-highest-grossing movie worldwide of all time -- has amassed box-office receipts of $2.068 billion as of Feb. 7, according to Box Office Mojo.

Consumer products and interactive media:Frozencomps remain challenging

Metric

Fiscal Q1 2017

Fiscal Q1 2016

Year-Over-Year Change

Revenue

$1.48 billion

$1.91 billion

(22.7%)

Operating income

$642 million

$860 million

(25.3%)

Data source: Disney.

Lower operating income in Disney's smallest segment was due to declines in merchandise licensing, games, and the retail business.

Merchandise licensing results decreased due to particular strength in the year-ago quarter of sales of merchandise based on Star Wars-- driven by the release of The Force Awakens -- and the phenomenally successful movieFrozen, which McCarthy said on last quarter's conference call will likely prove to be a challenging comparable for some time. Foreign currency translation also hurt results.

The decrease in the games business was due to a decline in licensing revenue fromStar Wars: Battlefront. This game was released in the year-ago quarter, whereas there was no comparable titles released in the current quarter. Retail was helped by solid sales of Moana merchandise, but that wasn't enough to match the sales of Frozenand Star Wars merchandise in the prior-year quarter.

Looking ahead

Disney posted a respectable quarter in light of the super-tough comparables it faced, thanks mostly to Star Wars: The Force Awakens, and the shifting of bowl games and New Year's Day into different fiscal quarters.

A notable catalyst for growth on the near-term horizon is the release of the live-action movieBeauty and the Beast, scheduled for March. The fiscal second quarter should also get a nice boost from Shanghai Disney, which CEO Bob Iger said on the earnings call proved to be enormously popular during the recent Chinese New Year. The park has welcomed more than 7 million guests to date, according to Iger.

Iger didn't specify on the call exactly when the company plans to use its BAMTech stake to launch a direct-to-consumer ESPN-brandedmultisport subscription video-streaming service. He merely said the target date remains fiscal 2017.

Investors should keep in mind that Iger said on the last earnings calls that management expects fiscal 2017to be a slower-growth year, but anticipates the company's strong recent growth dynamics will continue in fiscal 2018 and beyond.

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Beth McKenna has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has a disclosure policy.